Digging deeper for better returns

MartinCej

TORONTO (CBS.MW) - The stock market has been routed and the twin pillars of tech and telecom have crumbled alongside the credibility of dozens of equity analysts, who constructed their reputations and built their fortunes trumpeting the Next Big Thing.

Now, as many investors grope for a lifeline amid a morass of gutted chipmakers, computer companies, software developers, networking behemoths and Icarus-like Internet shares, tech stock analysts offer little more than excuses and a shrug of the shoulders. Many U.S.-based investment advisers and commentators are also eschewing stock picks in favor of money market funds, government bonds and cash.

Yet just north of the world's largest economy, Canadian petroleum companies, many of which trade on U.S. markets, generate healthy stock gains, propelled by booming commodity prices, a torrent of mergers and acquisitions and insatiable U.S. energy demand.

Canada's oil and gas stocks have quietly outpaced the world's benchmark stock indexes this year and last, and have assumed - for some prescient investors - the comforting mantle of safe haven investments with punch. What's more, these stocks are likely to continue their advance in the quarters to come.

The Toronto Stock Exchange's index of oil and gas stocks boasts a return of 52 percent over the past 12 months. By comparison, the Nasdaq Composite Index has been cut in half since March of last year.

Even the broader S&P 500 Index
SPX, -1.42%
considered the most accurate reflection among the major U.S. indices of the U.S. economy, has been unable to keep pace with stocks that hail from Canada's vast oil patch. The TSE Oil and Gas Index remains historically and relatively cheap as well. The index currently trades at a trailing price to earnings ratio of about 12.7 times, a far cry from S&P 500's multiple of 24.

Certainly, companies such as Alberta Energy
AOG, +6.05%
(AEC), Talisman Energy
TLM, -2.22%
(TLM), Anderson Exploration (AXL), Canadian Natural Resources
CED, -1.13%
(CNQ), Rio Alto Exploration (RAX) and others have benefited from the coldest North American winter in years, but investors needn't consider the Farmer's Almanac their primary analysis tool since the story behind the sector has little to do with the capriciousness of weather.

At a time when the clamor for cleaner-burning fuels has never been greater, nor the burden on the U.S. gas storage more severe, Canada is the largest exporter of natural gas to the U.S. A whopping 94 percent of U.S. gas imports came from Canada in 2000.

While coal is currently used to generate about half of U.S. electric utility production, the Environmental Protection Agency has launched initiatives to make coal more expensive -- and consequently, less attractive -- to electricity generators. That could lead to even more use of natural gas, which accounts for 15 to 20 percent of U.S. electric power generation.

Americans are demanding more energy now than ever, and that's unlikely to change anytime soon, even as some companies and consumers switch temporarily from natural gas to other fuels in a bid to control costs. The shuttering of plants and other manufacturing facilities as the U.S. economy shuffles to a halt is also unlikely to make a significant dent on natural gas demand in 2001 as the backlash from record high electricity costs in states such as California force the building of more gas-fueled power plants.

Furthermore, this year's frigid winter has not only taxed U.S. natural gas storage levels, but also stirred concern that supplies won't meet demand as the winter heating season nears its end.

November and December of 2000 had 37 percent more "heating degree days" -- or days considered chilly enough to require home heating -- than the same two month period a year earlier. The National Oceanic and Atmospheric Administration also reported that this two-month span was the coldest on record.

Neither analysts, nor the American Gas Association, expect U.S. storage to run dry, but there remains the potential for a cold snap in March and April to deplete levels to a point that prompts competitive bidding to refill storage facilities, causing yet another surge in gas prices.

For years, Canadian natural gas prices lagged those south of the border because of limited pipeline capacity, which prevented economical transportation south. Gas was left in the ground because companies didn't have the means to get it to U.S. consumers.

Now, with the October opening of the Alliance Pipeline, which stretches 1,857 miles from northeastern British Columbia to Chicago, Canadian gas producers are finally addressing U.S. demand at profitable levels.

Even President Bush's plan to open up the far north of Alaska to drilling could benefit some of Canada's oil and gas companies, not to mention its pipeline operators. Gulf Canada Resources
GOU, +8.54%
(GOU) is considered a prime takeover or merger candidate because of its Parsons Lake gas field in the Northwest Territories, which is at the delta where the 2,500-mile Mackenzie River meets the Beaufort Sea, a stone's throw from the wildlife preserve where Bush wants to drill.

Gulf estimates that it's sitting on 1.8 trillion cubic feet of natural gas in Parsons Lake, which translates into about 200 million to 300 million cubic feet per day of production.

So far in 2001, there have been 12 Canadian oil and gas companies targeted for takeovers including five constituents of the TSE's Oil and Gas Index, including Berkley Petroleum, Cypress, Encal, Numac and Startech, according to Calgary-based brokerage and research firm Peters & Co. And there are more to come.

On the oil front, U.S. oil consumption grew by an average of 1.6 percent annually from 1990 to 1999 while domestic production grew a modest 0.2 percent. Canadian petroleum imports to the U.S. grew by 60 percent in that period.

With production from mature oil fields in the U.S. and western Canada slowing, Newfoundland's Hibernia offshore oil field, Alberta's oil sands, and massive natural gas reserves in northwestern Alberta and the Maritime provinces, not OPEC, are taking up the slack.

The proximity of the U.S. eastern seaboard, and New York in particular, to the Hibernia, Hebron, Terra Nova and White Rose offshore oil fields -- with their recoverable reserves of 5.3 billion barrels, according to the Canadian Association of Petroleum Producers -- ensures robust demand for years to come.

Investors lamenting toppled tech and telecom stocks, and searching for alternatives could do worse, considerably worse, than to dig a little deeper. After all, there's petroleum and gas in them there Canadian hills.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.